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Chemed (CHE) Up 6.4% Since Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Chemed Corp. . Shares have added about 6.4% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Recent Earnings

Chemed’s fourth-quarter 2016 adjusted earnings per share (EPS) was $2.02 (considering stock option expense as a regular expenditure), missing the Zacks Consensus Estimate by 4.3% but ahead of the year-ago adjusted number by 6.3%.

Including one-time items, the company reported fourth-quarter net earnings of $1.99 per share, up 11.8% from the year-ago period.

Quarter in Details

Revenues in the quarter increased 1.2% year over year to $403.5 million, missing the Zacks Consensus Estimate of $409 million.

Chemed currently operates in the form of two wholly-owned subsidiaries viz. VITAS Healthcare Corporation – a major provider of end-of-life care and Roto-Rooter – a leading commercial and residential plumbing and drain cleaning services provider.

In the fourth quarter, net revenue at VITAS reached $284 million, down 0.1% year over year. The decline primarily resulted from a 2.1% rise in average Medicare reimbursement rate and a 2.9% increase in average daily census, offset by acuity mix shift which negatively impacted revenues by 1.9%. The recent alteration in the Medicare hospice reimbursement methodology also impacted revenue growth by 2.3%.

Roto-Rooter reported sales of $119 million in the fourth quarter, up 4.5% year over year. According to the company, revenues from water restoration increased 31.7% year over year to $13.7 million.

Gross margin expanded 7 basis points (bps) year over year to 30.8%. Adjusted operating margin expanded 77 bps to 15.3% in the quarter, on 3.1% rise in selling, general and administrative expenses to $62.5 million.

Chemed exited 2016 with total cash and cash equivalents of $15.3 million, up 4.1% from $14.7 million at the end of 2015. The company had total debt of $108.8 million at the end of the year, compared with $91.3 million at 2015 end. As of Dec 31, 2016, the company had approximately $287 million of undrawn borrowing capacity under its existing five-year credit agreement.

On Mar 11, 2016, Chemed’s board of directors authorized an additional $100 million for stock repurchase under the company’s existing share repurchase program. As of Dec 31, 2016, the company had $50.2 million of remaining share repurchase authorization under this plan.

2017 Outlook

On Jan 1, 2016, CMS implemented a revenue neutral rebasing to the Medicare hospice reimbursement per diem. Including the impact of rebasing, Chemed currently expects full-year 2017 revenue growth for VITAS (prior to Medicare Cap) in the range of 4–5%. Average Daily Census is estimated to expand approximately 3% to 4% while Medicare Cap billing limitations are projected at $5 million.

On the other hand, management anticipates full-year 2017 revenue growth of 3–4% for Roto-Rooter.

Including the impact of rebasing, the company expects to deliver adjusted EPS (considering stock option expense as a one-time item) in the range of $7.80–$8.00 for 2017.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimate. There has been one revision higher for the current quarter

At this time, Chemed's stock has a great Growth Score of 'A', though it is lagging a bit on the momentum front with a 'B'. Charting a somewhat similar path, the stock was allocated a grade of 'C' on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is primarily suitable for growth investors while also being suitable for those looking for momentum and to a lesser degree value.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. It comes with little surprise that the stock has a Zacks Rank #2 (Buy). We are expecting an above average return from the stock in the next few months.

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